Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence
- (pp. 411-50)
Abstract
A large literature examines demand-side barriers to product adoption. In this paper, we examine supply-side barriers in a setting with limited contract enforcement. We model the relationship between a distributor and its credit-constrained vendors. We show that the optimal self-enforcing arrangement can be implemented by providing vendors with a line of credit and the option to buy additional units at a fixed price. Moreover, the structure of this arrangement is optimal both for profit-maximizing firms and for nonprofit organizations with limited resources. We test the arrangement using a field experiment in rural Uganda. We find that the model-implied optimal arrangement increased distribution significantly compared to a standard contract. However, growth was lower than predicted by the model because vendors were unwilling to extend credit to customers and did not have access to a reliable savings technology. We discuss several recent technological innovations that help to overcome both of these challenges.Citation
Fuchs, William, Brett Green, and David Levine. 2022. "Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence." American Economic Journal: Microeconomics, 14 (1): 411-50. DOI: 10.1257/mic.20190085Additional Materials
JEL Classification
- C93 Field Experiments
- D86 Economics of Contract: Theory
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- L14 Transactional Relationships; Contracts and Reputation; Networks
- L26 Entrepreneurship
- L31 Nonprofit Institutions; NGOs; Social Entrepreneurship
- O14 Industrialization; Manufacturing and Service Industries; Choice of Technology
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